Types Of Credit Cards
Theres a universe of credit cards out there, and it can be fun searching for your ideal pick. Here are some of the different card types youll find on the market.
Basic credit cards
A basic credit card comes with very basic features and few of the perks or rewards you might get with other cards. Common features may include low-interest rates or a $0 annual fee.
- Low interest. This type of card can offer a low-interest rate forever or a very low-interest rate at the beginning that reverts to a higher rate later.
These are designed to help you save money over time if you have to carry a balance.
- Balance transfer. With a balance transfer, you move your credit card debt to another card. A balance transfer card gives you a low-interest rate when you move your debt.
Some basic cards may carry this feature, though youre more likely to find this on a dedicated balance transfer card.
The pros and cons of a basic credit card
- You will be saving money immediately with no annual fees.
- Lower interest fees. Interest fees can represent the largest cost when it comes to credit cards, so having a card with low or no interest fees can translate into substantial cost savings.
- Less temptation to spend.Having a lower reward earning means you wont be tempted to spend unnecessarily.
- Less possible debt.If you have a lower interest rate on purchases, youre more likely to be able to repay your balance in full and avoid falling into debt.
Rewards credit cards
Specialty credit cards
Fact: Paying Less Than The Minimum Is Still A Missed Payment
If you dont pay the total minimum payment on your credit card bill, your credit card company may report it as a missed payment. This can bring down your credit score and make it more difficult to qualify for credit in the future. Check your statement for the minimum amount due, and be sure to pay it on time to keep your account current. And remember: Paying more than the minimum amount due is a great way to pay down your debtand until you pay it off, interest will continue to be charged each month.
Using A Credit Card To Build Credit
If youre new to using credit or want to improve a less-than-stellar credit history, getting a credit card may be a good first step for you. There are two types of cards you can apply for: Secured and unsecured.
Secured cards require a deposit, which is often refundable, thats usually equal to your credit limit and will be used as collateral. Unsecured cards dont require collateral and are granted based on your creditworthiness. Secured credit cards often have less-stringent application requirements than unsecured cards.
Payment history for both types of cards is typically reported to the three major consumer credit bureaus. Making your payments on time and in full can help you establish a pattern of responsible borrowing and can help you boost your credit, whereas late payments can negatively impact your credit.
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Foreign Currency Conversion Charges
Financial institutions calculate foreign currency charges in different ways. Some transactions are converted directly into Canadian dollars. Others may be first converted to U.S. dollars and then to Canadian dollars. The foreign currency conversion charge is applied after the purchase is converted to Canadian dollars.
Example: Foreign currency conversion charge calculation
Suppose you made a 1,000 purchase with your credit card. The exchange rate is 1.42 to convert euros directly to Canadian dollars. Your credit card agreement shows a conversion charge of 2.5%.
After your financial institution converts your 1,000 purchase to Canadian dollars, it will cost $1,420. The 2.5% foreign currency conversion charge is applied to the $1,420 for a fee of $35.50. The total amount of your purchase is $1,455.50 in Canadian dollars.
Read the terms of your credit card agreement for the total foreign currency conversion charge. Ask your financial institution about anything you dont understand.
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Make Your Credit Card Balance A Part Of Your Monthly Budget
A great way to maintain a tight grasp on your credit card spending habits is to use it for prepaid bills. This means using your card for bills included in your budget and paid each month anyways. This allows you to experience two benefits purchases on your card means you get the added rewards and you can then use your cash to make the credit card payment.
Therefore your balance remains null or minimal, interest charges are avoided. And of course, your credit utilisation remains a favourable ratio and your credit standing remains intact. In recent years, research has shown that Indian consumers know very little about their credit scores and histories although this has increased since then. Around 62 percent did not know lenders checked when considering a loan.
Moreover, creditworthiness also plays an important part in a simpler acceptance process for further consumer credit.
Does Keeping A Balance Help Your Credit Score
, or the amount of your available credit you have used, is an important factor in your credit score. Second only to payment history, it counts for about 30 percent of your total FICO score. VantageScore uses a weighted scale and calls this part extremely influential.
Heres a simple illustration: you have a with a $500 limit and you use $250 to make a purchase. Your credit utilization ratio is 50 percent. This is going to be bad for your credit score. Conventional wisdom says you would need to use no more than 30 percent, or $150, to keep from losing points in your credit score. I personally believe that the percentage to shoot for is 25 percent or less, or $125, in this example. Keep in mind that this is the total amount you should spend in one billing cycle on this card.
Chances are you have at least one more credit card, so we have to take that into account as well. Lets say the second card has a $1,500 limit and you have used $400. This puts you between the 25 percent and 30 percent utilization ratio on this card. This is important because while each card will be counted separately, they will also be combined to come up with a total.
Overall in this example, the utilization rate is 26.25 percent . So you are a little higher than I would recommend, but your score should not be negatively impacted. It also probably wont go up much, either.
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What Is A Credit Score
A is a number that indicates your risk as a borrower and the likelihood that youll pay your bills on time. Specifically, a FICO or VantageScore credit score predicts the likelihood that you will pay any credit obligation 90 days late within the next 24 months. Credit scores are determined by mathematical models and are based on information in credit reports.
You do not have just one credit score.FICO is the most commonly used brand of credit score by lenders in the U.S., and VantageScore is another brand thats gaining popularity. Under each brand there are multiple credit scoring models. FICO also has different industry-specific scores under each scoring model .
Since there are three different credit bureaus, each type of credit score could be calculated based on any one of your three credit reports.
Many popular credit scoring models use a range of 300 to 850. A good credit score is typically anything above 670, but this is subjective.
It may be tempting to watch your credit scores closely and obsess over every point, but thats probably not the best use of your time and energy. Credit scoring models are proprietary, so you may not always know exactly why one of your credit scores has gone up or down by a few points.
Instead, focus on the fundamentals of building good credit history. These include:
- Paying all your bills on time
- Keeping your utilization low
- Not letting others pull your credit reports too frequently
Debt As An Investment
When you make an investment, youre putting your money to work in hopes of gaining a profit. When you take on a loan, youre basically paying to borrow money. But did you know that debt and investment can work together? Its true. Just take a look at a few examples of debt transforming into an investment:
If you buy a house as an investment, your goal is to see that house or property increase in value.
If you assume a student loan, like in our example above, your goal would be to complete your education so that you can increase your income.
If you open a business loan or line of credit, your goal is to transform that loan from a debt into a profitable business.
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Smart Ways To Use Your Credit Card
- Find a card that suits your spending habits and the way you’ll pay it off.
- Look for a low interest rate and features you’ll use make sure any rewards or extras are worth it.
- Stay on top of your spending only spend what you can afford to pay back.
- Pay your bill on time every month pay in full, or as much as you can.
- Check your statement and tell your credit provider if there’s a charge you didn’t make.
- If you’re struggling with debt, avoid using your credit card to make ends meet. Find help to get debt under control.
From July 2020, if you bank with ANZ, Commonwealth, NAB or Westpac, you’ll be able to share data from savings and transaction accounts and debit and credit cards. Find out more about the Consumer Data Right
Other Times To Use Credit
While you should primarily use credit cards as a credit-building tool, there are other times when it can be a good idea to use credit, like paying off debts or financing large purchases you cant afford to pay in cash. However, and this is a big however this is only recommended if you have a credit card with a very low APR, close to or equal to 0%. Higher interest rates/APRs mean higher borrowing costs, and you want to keep as much of your money for yourself as you can, right?
If you have a good credit score, financial institutions may offer you cards that have introductory 0% APR promotions essentially, for a given number of months , you wont be responsible for making interest payments on any of the money you spend on the card.
There are two strategic ways you can make the most of this deal:
- Transfer existing debts into the 0% APR account and pay them off
- Break a major purchase into smaller, more manageable payments that youll pay in full over the intro APR period
Pro tip: If you find yourself fortunate enough to be approved for a 0% APR credit card, its wise to monitor your spending closely you could be left with substantial interest payments to make if youre unable to pay your full balance before the intro APR period ends.
An Important Note on Rewards Programs
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Starting To Build Credit With A Credit Card
To start building credit with a card, you’ll need to either open a credit card of your own or become an authorized user on someone else’s credit card. Getting a card of your own can be difficult if you’ve never had credit before, or if you have poor credit. However, there are options.
- Secured credit cards are often a stepping stone if you’re starting to build or rebuild your credit. These cards function like normal credit cards, but you’ll have to send the card issuer a refundable security deposit when you open your account. Secured cards may have high fees and don’t necessarily offer great cardholder benefits, but responsible use can help you qualify for better credit cards later.
- A student credit card can also be a good first option if you’re a student. Student cards tend to have low credit limits however, there are student cards available that have few fees and offer rewards on purchases.
You can also ask a friend or family member to add you as an on one of their credit cards. When they do, their credit card company can report the account to the bureaus under your name as well. You’ll get your own card and can make purchases, as long as the primary cardholder agrees.
Having another person’s card as part of your credit history can help you build creditas long as the primary user manages their card well. Your credit won’t be helped if the primary cardholder doesn’t make payments on time, for example.
Use For Only Big Things
Credit card debt creeps up on a lot of people with small £10, £20 transactions over the month, instead why not use your card for larger ticket purchases instead.
The best way to do this is to have the majority of the cash available for the large purchase first. Then, after you make the purchase and reap the rewards of your credit card, pay the purchase off as quickly as you can. Again to avoid unwanted interest.
You can also use your card for large, important purchases and then pay it off over a few months with a strict timeline. Of course, youll pay a little bit of interest for the pleasure of spreading out the payments but it allows you that little bit of breathing space. If you choose to purchase a large item and spread the payments over a few months do make sure youre prepared to keep the payments up for this time period.
My advice was to not use your card for any further purchases until youve settled your credit card from the large purchase. You dont want to be in a constant cycle of chasing your credit tail.
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Set Spending Limits Each Month
Adopt a simple mantra when it comes to your credit cards: only spend in credit what your income can cover. This point highlights the importance of a well-done budget each month since a good budget means you are able to better grasp how much you have left after standard bills. You should then use this amount as a base when deciding what purchases to make using your card.
Remember, credit purchases means you are simply putting off paying the amount for a later time or splitting payments. At the end of the day, you do still need to make those payments.
Know Work Charges Could Affect Your Credit
Another factor to weigh before using your personal card for work: how will it affect your credit score?
In some cases, using your card for work wont have much effect on your credit. Or, if it causes a temporary dip in your score, that may not cause you any problems. But in certain situations, charging company expenses on your own card might directly harm you, Green said. Here are some questions to ask that will help you decide if its a bad money move to charge work expenses on your card right now:
- What is your ? This is a term that refers to the amount of your available credit limit that youre using. Your credit use accounts for almost one-third of your FICO score. A good general rule to follow is to keep your utilization ratio below 30%. If youre already loaded down with debt and your boss wants you to charge pricey conference tickets, you may want to think twice.
- Do you plan to apply for credit soon? Your credit utilization ratio may be an issue if youre planning to apply for a mortgage or other loan soon. With a mortgage application, even a slight change to your credit profile could throw a hitch into the process or even raise your interest rate. If that happens, it could cost you thousands of dollars extra over the life of the loan all because your boss asked you to charge those plane tickets to the conference on Maui.
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Rule #: Always Pay Your Bill On Time
The most important principle for using credit cards is to always pay your bill on time and in full. Following this simple rule can help you avoid interest charges, late fees and poor credit scores. By paying your bill in full, you’ll avoid interest and build toward a high credit score.
The consequences of missing a payment
You’re usually given multiple options to pay your each month. While it may be tempting to pay just the minimum payment which could be as low as $25 you’ll start to accrue interest, leading to years of debt. The best practice is to pay off your credit card bill as soon as you make a purchase. This way, you can get into the habit of paying your bill long before its due date.
Each month, your issuer will provide your credit card statement with two dates: the closing date and payment date:
- The closing date is the last day you can make a charge for a monthly statement. After the closing date, any new transaction will go onto next month’s statement.
- The payment date tells you when the payment for a particular statement is due.
In the example above, this user has a closing date of Jan. 16 and a payment date of Feb. 13. This monthly statement ran from Dec. 17 to Jan. 16, with a payment due on Feb. 13. In this case, you have a 28-day grace period after your statement date before you’re required to make a payment. You won’t be charged any interest during this grace period as long as you pay in full by the due date.
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